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China's CNOOC offers $15.1 (U.S.) billion for Calgary-based Nexen Inc., which has operations around world including Alberta's oil sands.

Nexen chief executive Kevin Reinhart addresses the company's annual meeting in Calgary. Nexen has faced numerous challenges over the past few years, most recently the troubled launch of its Long Lake oilsands project in northern Alberta. (Jeff McIntosh / THE CANADIAN PRESS)

By Vanessa Lu and John SpearsBusiness Reporters

Mon., July 23, 2012

State-controlled Chinese oil giant CNOOC Ltd. has made a $15.1 billion (U.S.) offer to buy Calgary-based Nexen Inc., which has operations in the oil sands as well as overseas.

The blockbuster deal—China’s biggest takeover of a foreign energy firm—needs sign-offs from shareholders, Industry Canada and the Competition Bureau, reignites the controversy of foreign ownership of Canadian companies and puts political pressure on Ottawa’s energy strategy.

But while nationalists decried the deal, observers expect the takeover will be approved, and predicted more transactions in the offing.

“How are you going to feel about the next three deals, where you’re talking about an additional $50, $60, $100 billion?” said Richard Dixon of the University of Alberta.

He said the question will recur since the Chinese are looking for more secure supplies of oil, but 75 per cent of the world’s supply is held by state-owned companies and not for sale. Of the remaining “free” oil open to acquisition, half the reserves are in Alberta, he said, making it likely the energy-hungry Chinese will be back.

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As if to underline his words, on Monday Talisman Energy announced plans to sell a 49 per cent interest in its North Sea operations to China’s Sinopec for $1.5 billion.

Though the Harper Conservatives blocked the takeover of Potash Corp. in BHP Billiton in 2010, they aren’t likely to do the same with Nexen, said Walid Hejazi of Rotman School of Management.

“They have a majority government now. They committed to make Canada more open to foreign investment,” he said, adding that specifically means beyond the United States.

Maude Barlow, who heads the Council of Canadians, was distressed.

“What is the hurry to give the stuff away?” she asked. “Are we the Boy Scout of globalization? Canada is the most open country in the world in terms of come on in and buy anything and we won’t set any rules.”

In Ottawa, the NDP is calling for a thorough and transparent public review of the friendly deal.

CNOOC, or China National Offshore Oil Company, made an $18.5 billion (U.S.) offer for Unocal in the U.S. in 2005, but it fell apart as U.S. politicians raised national security concerns.

This time around, CNOOC has made specific gestures to head off concerns about a state-controlled Chinese enterprise buying an Alberta company.

They include keeping Nexen’s current management team and employees, establishing Calgary as CNOOC’s North and Central American headquarters, which will manage Nexen’s global operations, implementing and enhancing capital expenditure program in Canada, and a proposed listing of CNOOC’s shares on the TSX.

“We intend to be a local company as much as a global one,” CNOOC chief executive Li Fanrong pledged in a conference call Monday.

State-controlled CNOOC is looking for energy assets to power Chinese growth.

And Nexen, which has been plagued with operating problems at its Long Lake oil sand operation in Alberta, needs CNOOC’s plentiful cash to fund its plans in Alberta and elsewhere.

CNOOC is offering a hefty premium of more than 60 per cent on Nexen’s recent share price.

The $27.50 (U.S.) offer is a “very high price,” said Lysle Brinker of HIS Herold, whose own analysis put a value of $21.50 a share on Nexen.

Nexen shares closed Monday on The New York Stock Exchange at $25.90 (U.S.), up $8.84.

“Nexen will be challenged to fully finance its projects going forward. Having the deep pockets of the Chinese will be helpful,” Brinker said.

He said it’s unlikely competing bids will emerge.

“This is really a knock-out bid,” he said. “It’s hard to see anyone coming along to top it.”

Experts believe it’s unlikely regulatory hurdles will emerge, either.

While some criticize when Canadian companies are bought by foreign investors, Hejazi at Rotman argues there are benefits, especially for Alberta.

“There’s no hollowing out,” he said. “In fact, all of their commitments are keeping it in Canada.”

But Barlow warned that controlling a state-controlled company like CNOOC is even tougher than controlling private multi-national oil firms in areas like environmental protection.

“It’s a whole new ball game when you’re talking about a state-owner company of a superpower that is scouring the world for permanent access to resources,” she said.

After today’s deals, Chinese companies will have spent about $49 billion on buying Canadian fields and oil companies, according to Bloomberg data, compared to $3.5 billion in U.S. acquisitions.

The takeover will give CNOOC full control of Nexen’s trouble-plagued oil sand operation at Long Lake. The Chinese company acquired Nexen’s partner at Long Lake, OPTI Canada, a year ago after OPTI filed for protection from its creditors.

The Long Lake project uses bitumen from its own underground wells to fuel its operations, and has an on-site upgrader to produce synthetic crude. It has never hit production targets since it began operating in 2008.

Industry Minister Christian Paradis said in a statement CNOOC is expected to file an application shortly for review under the Investment Act. The minister has 45 days for the review, although extensions can be granted. In the end, he must be satisfied “that a proposed investment is likely to be of net benefit to Canada.”

Laura Dawson, president of Dawson Strategic, which specializes in cross-border market issues, said every significant acquisition undergoes Industry Canada’s scrutiny and the “net benefit” test to Canada.

“When it comes to Canadian resources, stuff in the ground, I think the industry minister does tend to give a sober second thought,” she said. “If it’s a manufacturing industry, and nobody wants to pick it up, the net benefit to Canada is pretty clear.

“If it’s a resource that’s in high demand, they give it an extra level of focus,” she said.

But Dawson added any foreign investor —Chinese, Australian, whoever—must follow Canadian environmental, labour, regulatory and commercial rules, and if they don’t, there are severe consequences.

The Chinese are likely to put that to the test, said Dixon. Up to now, the Chinese have mainly acquired minority stakes or partnerships in Canadian energy ventures. The Nexen deal marks a change as they look for a majority stake in a major player, he said.

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